Foundations of Business

     Business is the organized effort of individuals to produce and sell, for a profit, the goods and services that satisfy society's needs. Four kinds of resources&-material, human, financial, and informational&-must be combined to start and operate a business. The three general types of businesses are manufacturers, service businesses, and marketing middlemen.

     Profit is what remains after all business expenses are deducted from sales revenue. It is thus the payment that business owners receive for assuming the risks of business: primarily the risks of not receiving payment and of losing whatever has been invested in the firm. Most often, a business that is operated to satisfy its customers earns a reasonable profit.

     By studying business, you can become a more informed consumer and investor and be a better employee. And with a working knowledge of business, you may decide to open your own business.

     Since its beginnings in the seventeenth century, American business has been based on private ownership of property and freedom of enterprise. And from this beginning, through the Industrial Revolution of the early nineteenth century, to the phenomenal expansion of American industry in the nineteenth and early twentieth centuries, our government maintained an essentially laissez&-faire attitude toward business. However, during the Great Depression of the 1930s, the federal government began to provide a number of social services to its citizens. Government's role in business has expanded continually since that time.

     Economics is the study of how wealth is created and distributed. An economy is a system through which a society decides those two issues. Capitalism our economic system stems from the theories of Adam Smith. Smith's pure laissez&-faire capitalism is an economic system in which these decisions are made by individuals and businesses as they pursue their own self&-interest. Any economic system must answer three questions: What goods and services will be produced? How will they be produced? For whom will they be produced? In a laissez&-faire capitalist system, the factors of production are owned by private individuals, and all individuals are free to use (or not to use) their resources as they see fit; prices are determined by the workings of supply and demand in competitive markets; and the economic role of government is limited to protecting competition.

    In planned economies, government, rather than individuals, owns the factors of production and provides the answers to the three basic economic questions. Socialist and communist economies are&-at least in theory&-planned economies. In the real world, however, no economy attains "theoretical perfection."

     One criterion for evaluating the performance of an economic system is to assess changes in productivity, which is the average level of output per worker per hour. A general economic performance measure is gross national product (GNP), which is the total dollar value of all goods and services produced by all the citizens of a country for a given period of time. Although similar to the GNP, the gross domestic product (GDP) is the total dollar value of all goods and services produced by citizens physically located within a country.

     Economists recognize four degrees of competition among sellers. Ranging from most to least competitive, the four degrees are: pure competition, monopolistic competition, oligopoly, and monopoly. The factors of supply and demand generally influence the price that consumers pay producers for goods and services.

     Our economic system is thus a mixed economy capitalism cut with some socialism. Although our present business system is essentially capitalist in nature, government takes part in it, along with households and businesses. In the circular flow that characterizes our business system, households and businesses exchange resources for goods and services, using money as the medium of exchange. Government collects taxes from businesses and households and uses tax revenues to purchase the resources and products with which to provide its services.

     Today, there are a number of significant challenges for American business. If we as a nation can become more competitive, we may solve our domestic problems. As an added bonus, increased competitiveness will enable us to meet the challenges posed by foreign nations.